Home > Corruption, Papua New Guinea > National Provident Fund Final Report [Part 45]

National Provident Fund Final Report [Part 45]

Below is the forty-fifth part of the serialized edited version of the National Provident Fund Commission of Inquiry Final Report that first appeared in the Post Courier newspaper in 2002/3.

NPF Final Report

This is the 45th extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.

Executive Summary Schedule 4G Continued 

Additional sales August-December 1997 

Between August and December 1997, NPF management sold additional Orogen shares as follows:


The board was not explicitly informed of any of these transactions, though reference to them was made in the equity investment schedules.


(a) The additional sales of Orogen shares, between August and December 1997, were made without board approval; and
(b) There was a breach of Section 61 of the PF(M) Act in respect of the shares sold on September 26 and 30, 1997.

Investment In Orogen – 1998 

During the economic downturn of 1998, NPF management acquired a further 425,000 Orogen shares for $A1,011,935, without NPF board approval:-


Sources: NPF accounting records/ Wilson HTM statements/Merrill Lynch Statement (Exhibits OR11 to OR13)

It seems that despite the general economic downturn and the falling value of Orogen shares neither the NPF management or the board reviewed this investment.


(a) The Board of Trustees did not adequately consider the implications of Orogen’s falling share price, in terms of NPF’s investment portfolio;
(b) It failed to address the following:

  • The impact of this investment on NPF’s strategy i.e., whether the fund should hold the investment long- term, consider reducing its exposure or sell its holding;
  • The impact on NPF’s ability to comply with the ANZ Bank loan covenants as the Orogen share scrip was held as security for NPF’s foreign currency loan with ANZ Bank;
  • The NPF board members should have, but did not, seek independent investment advice regarding this investment, especially towards the end of 1998, when the share price fell and huge unrealised losses were incurred;
  • NPF’s investment division headed by Mr Wright gave limited advice to the board;
  • Transactions undertaken by the management were made without the approval of the board, and the board was not explicitly notified, in this regard; and
  • These failings of the NPF Board of Trustees and management, constituted a breach of their duties as Trustees and officers of NPF.

Investment In Orogen 1999 

On February/March 1999, Pricewaterhouse Coopers (PwC) advised NPF on how to cope with its desperate financial situation. Following this advice, by circular resolutions, NPF resolved to sell off most of its equity portfolio including 50 per cent of the investment in Orogen.

In summary, the Orogen sales were as follows:-


Sources: NPF accounting records / Wilson HTM statements (Exhibits OR11 to OR13)

Wilson HTM was appointed as sole agent for the sell-down, without NPF board approval.


Orogen consistently paid dividends to NPF totalling K2,506,627 between 1996 and 1999. The annual dividends were as follows:



The study of the investments showed that it was reasonably profitable because it was a passive investment in a large, professionally-run company which had spread its risks by

investing in a wide range of PNG resource companies, many of which had well established, commercially-producing resources and / or excellent prospects. NPF had no say in the management of Orogen, except to vote as a small investor.

Examination of the performance of NPF management and trustees in the initial acquisition, subsequent purchases and eventual sell-down shows: breaches of fiduciary duty; failure of management to give the board proper advice and to keep it fully informed; and failure of the trustees to seek advice and to exercise their authority in the interests of the members of the fund.

Executive Summary Schedule 4J BSP Investment 


This was a passive, risk averse investment in a consistently profitable bank. NPF never held more than 10.48 per cent of the company and it has been a safe and profitable investment for NPF.

The initial investment was made well before January 1990 and in January 1995, NPF held 812,500 shares.

During the period under review, NPF purchased 504,078 convertible notes, which were later converted to shares. At the end of the period under review, NPF held approximately K7.2 million BSP shares, making an unrealised profit during the period of K4.8 million. In addition, the regular annual dividends during the period under review, totalled K2.36 million and directors fees amounting to K500 per sitting were paid, or are payable to NPF (See paragraph 9.1 of the Report).

The investment was marred by management’s failure to keep the NPF board fully informed of its activities, some of which were beyond management’s delegated authority and by the board’s failure to maintain control over management.

Management failed to provide expert advice to the board and the board failed to seek it. These matters are reported on in detail in the text of Schedule 4J and in the Schedule of findings at paragraph 12.

Despite its safe profitability, there were two attempts to sell-off this investment. The first was a proposed sale to the Defence Force Retirement Benefit Fund (DFRBF) by Mr Wright in December 1997.

This occurred in a fit of pique after he felt he had suffered personal affront when BSP refused to invest in the NPF Tower. This attempted sale came to nought when the DFRBF discontinued the purchase.

The second attempted sale occurred in March/ April 1999, when there were negotiations to sell NPF’s BSP shares to Finance Pacific, parcelled together with the sale of Government Roadstock. This sale did not proceed as described below.

NPF appointed directors to the BSP board and their fees were paid to NPF.

NPF still holds its BSP investment, which continues to be profitable in terms of dividends and unrealised gains.

Investments In 1995 

In 1995, BSP increased its capital base by issuing convertible notes. NPF purchased 504,078 notes in two parcels for a cost of K504,078. The management papers prepared for the NPF board gave a reasonable brief to the trustees, except that for several months, Mr Kaul was referring to the convertible notes as “shares”.

In December 1995, a further 96,598 notes were purchased for K96,598 without obtaining the requisite board approval beforehand. No expert advice was provided on the 1995 investment.


(a) Mr Kaul and Mr Wright exceeded their delegated powers by purchasing 96,598 BSP convertible notes on December 18, 1995;
(b) The trustees failed in their fiduciary duty to the members by not reprimanding Mr Kaul and Mr Wright for the purchase of 96,598 convertibles notes without the board’s approval;
(c) Mr Kaul’s frequent reference to convertible notes as “shares” in management briefs, was confusing and misleading;
(d) NPF management (Mr Kaul and Mr Wright) failed in their duties to provide timely and accurate information to the board about the fund’s investment in convertible notes;
(e) Mr Kaul failed in his fiduciary duty when he did not inform the trustees of Mr Haiveta’s instructions to POSFB, MVIT and NPF not to withdraw their deposits from BSP as the bank’s liquidity problems were so acute;
(f) The NPF management and the trustees failed in their fiduciary duties to the members due to the fact that the initial and subsequent purchases of convertible notes were made without specific professional and independent advice;
(g) Minister Haiveta’s direction of January 18, 1995, for NPF not to withdraw deposits from BSP was an improper interference with NPF’s statutory authority. It demonstrates the conflict of interest inherent in having Ministerial responsibility for the State’s financial affairs, the banking system and NPF. The Minister’s responsibility for State affairs is in potential conflict with his responsibility for NPF and its members.

Investments In 1996 

The NPF board, by circular resolution, approved the purchase of an additional 300,000 shares from the Defence Force Savings and Loan Society for K480,000.

There was no valid reason why this occurred by way of circular resolution.

In a paper seeking ratification of the resolution by the board, Mr Kaul misrepresented the number of notes already held by the NPF. He gave the figure as 230,921 instead of 504,078. No independent expert advice was obtained in this regard.


(a) The purchase of 300,000 additional shares, together with 504,078 convertible notes, took NPF’s total holding in BSP to 13.25 per cent. It was imprudent not to have obtained independent investment advice and not to have performed a critical investment analysis. Accordingly, this represents a failure on NPF management and board in their fiduciary duty to the members;
(b) The trustees failed in their fiduciary duty where they did not ratify the circular resolution approving the purchase of 300,000 shares at the next scheduled board meeting;
(c) The NPF management and board failed in their fiduciary duties to the members because a professional independent valuation of the share purchases was not performed to ascertain whether the purchase price was fair. This was imprudent; and
(d) Mr Kaul’s report, included in the board paper for the June 28, 1996, meeting, stated that NPF owned 230,921 convertible notes. This was inaccurate and misleading, as NPF owned 504,078 convertible notes as at December 31, 1995.

During 1996, management failed to report the purchase of K96,598 worth of convertible notes and the board failed to inquire about this purchase. In August, however, the board did direct management to report on BSP’s prospects.

This is one of the rare instances during the period under review where the NPF board made a firm corrective resolution directing management to perform its proper role.


(a) Management failed to notify the board of the purchase of K96,598 worth of convertible notes in December 1995 and the trustees failed to inquire into this purchase throughout 1996;
(b) Trustees showed strength and initiative in requiring a management paper on BSP in August 1996.

Investments In 1997

NPF did not buy or sell BSP shares or notes during 1997. It monitored this investment by way of Mr Kaul’s attendance at BSP Board of Directors meetings, rather than by way of reports at NPF board meetings.

There was concern that BSP’s capital base was insufficient to enable it to grant the large loans required by NPF. BPNG failed to approve a BSP loan of K30 million to NPF for this reason.

Revaluation of BSP share value

In October 1997, Mr Wright revalued NPF’s BSP shareholding, raising the value to K3 per share. This gave an unrealised gain of K2,565,650 to NPF. He did not obtain any expert advice on the revaluation.

Proposal by Mr Wright to sell NPF’s BSP investment 

In December 1997, Mr Wright recommended the sale of NPF’s BSP holdings to the DFRBF. His paper to the NPF board clearly shows that a large part of his motivation for recommending this sale was that the BSP management had decided not to participate in the construction of the NPF Tower, which had been discussed.

Mr Wright’s emotional state and sense of betrayal is disclosed by the language he used, including the following:

“Given the above, I almost find it a personal affront that the BSP board have not given support to the Tower when the NPF board has never failed them.”

In order to state a case that BSP owed it to NPF to support the Tower project, Mr Wright disclosed that NPF had previously placed 70 per cent of its IBD’s with BSP, a “small bank” and that NPF had borrowed from BSP at a higher rate than could have been obtained at a larger bank.

However, if these claims are true, they indicate that NPF management made inappropriate investment decisions, which were against the best interests of NPF’s members.

Despite the fact that Mr Wright’s personal, emotional bias was clearly displayed, the NPF board resolved to approve his recommendation to sell-off its very satisfactory BSP investments, as recorded in the minutes of the NPF board meeting of December 11, 1997:

Bank South Pacific Limited (BSP) 

The deputy managing director tabled an offer from Kina Securities Limited to pay K3.75 for NPF’s share holding in Bank South Pacific on behalf of the Defence Force Retirement Benefit Fund. The offer was made subject to final approval from the Defence Force Retirement Benefit Fund board.

It was noted that in relation to NPF’s dealings with BSP over the past several months:

(i) BSP refused to take an equity position in the NPF Tower; and

(ii) BSP refused to take up floor space in the NPF Tower; and

(iii) There was much reliance on the expertise of Noel Smith, the current managing director of the bank who obtained his support from the National Bank of Australia.

(iv) The bank’s low capital base prohibited it from lending to major clients so it could never be in the big league.

In view of these matters it was resolved to approve the share sale to Kina Securities Limited”. (Exhibits B79-B81)


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  1. October 8, 2015 at 12:00 pm

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